2010 (2) TMI 695 - AT - Income Tax

Profit from share trading business - STCG or Business income - The assessee during the previous year had entered into transactions of purchase of shares of about 200 companies and all those shares were sold - The above transactions were effected by taking and giving of shares at the time of purchase and sale, besides such transactions the assessee had also entered into transactions of purchase and sale of shares where there was no actual delivery - Both the transactions were in respect of transaction of purchase and sale of shares where the holding period was less than 12 months - The profit on transaction and sale of shares where there was no delivery was offered to tax by the assessee as speculative income under the head business income - The income from other transactions where there was actual delivery was claimed by the assessee to be STCG - Such transactions were about 800 in number during the previous year - The maximum holding period was from 1 day to maximum 6 months - The nature of speculative transactions have been considered by the assessee herself to constitute business - The income from delivery based transactions are sought to be projected as STCG only because there was actual delivery and because they were shown as investments in the books of account of the assessee - Thus, the conclusion of the revenue authorities that the income from sale of shares declared by the assessee as STCG is income from business is correct and calls for no interference - Appeal is dismissed

Issues Involved:
1. Classification of income from share transactions as short term capital gain (STCG) or business income.
2. Assessment of the assessee's intention behind share transactions.
3. Application of principles from judicial pronouncements to determine the nature of income.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue in this case is whether the gain of Rs. 9,21,339 from the purchase and sale of shares should be assessed under 'income from business' as claimed by the revenue or under 'capital gain' as claimed by the assessee. The assessee had declared income from business, STCG, and other sources in her return. The Assessing Officer (AO) observed that the assessee engaged in voluminous share transactions, some of which were speculative (without delivery) and some delivery-based. The AO argued that the frequency and volume of delivery-based transactions indicated a business activity rather than investment, thus treating the STCG as business income.

2. Assessment of the Assessee's Intention:
The assessee contended that she had been consistently declaring similar transactions as capital gains for the past 18 years, which was accepted by the revenue. She maintained that the shares were intended as investments, evidenced by taking delivery, recording them as investments in her books, and receiving dividends. However, the AO countered that the short holding periods, substantial volume of transactions, and use of borrowed funds indicated a trading motive. The CIT(A) upheld the AO's view, noting that the transactions were frequent, involved significant amounts, and the shares were held for very short durations (1 day to 6 months).

3. Application of Judicial Principles:
The Tribunal referred to several judicial pronouncements to determine the nature of income:
- Whether transactions are trading or investments is a mixed question of law and fact (CIT v. H. Holck Larsen).
- An assessee can be both an investor and a dealer in shares, and the distinction must be evidenced by the assessee's records (CIT v. Associated Industrial Development Co. (P.) Ltd.).
- The treatment in books is not conclusive; systematic and organized activity with profit motive indicates business income (CIT v. Motilal Hirabhai Spg. & Wvg. Co. Ltd.).
- The intention at the time of purchase is crucial; purchase with an intention to resell under changed circumstances is capital gain, otherwise, it is business profit (CIT v. PKN, Saroj Kumar Mazumdar v. CIT).
- No single factor is decisive; the collective effect of all relevant materials must be considered (Janki Ram Bahadur Ram v. CIT).

Analysis of Facts:
The Tribunal analyzed the facts and concluded that the assessee's transactions exhibited characteristics of business activity:
- High volume and frequency of transactions (800 transactions involving 200 companies).
- Short holding periods (1 day to 6 months).
- Significant amounts involved (Rs. 1,01,51,786 in purchases and Rs. 1,10,45,798 in sales).
- Use of borrowed funds for transactions.
- The primary activity of the assessee was share trading, with minimal dividend income.
- Systematic and regular nature of transactions.
- The assessee's conduct indicated a trading motive rather than investment.

Conclusion:
The Tribunal upheld the revenue's classification of the income from share transactions as business income, affirming the CIT(A)'s order. The appeal by the assessee was dismissed, with the Tribunal emphasizing that the nature of the transactions, the volume, frequency, and the assessee's conduct collectively indicated a business activity rather than investment. The decisions cited by the assessee were distinguished based on the specific facts of this case, particularly the summary assessment and the short duration of holding periods.

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